MLP ETFs Have Post-Election Hangover

It’s a little more than a week out, but one of the biggest losers from the 2012 elections so far has been the entities responsible for transporting oil and gas across North America and storing petroleum products. Master Limited Partnerships have seen a string of steep sell-offs in recent days, erasing the impressive gains that had been accumulated during the first ten months of the year. These generally stable entities have seen significant downside volatility in recent days, stringing together long losing streaks that are uncommon in this corner of the energy market [see our Energy Bull ETFdb Portfolio].

Higher Taxes, Lower Drilling

With uncertainty looming over the tax picture in 2013, part of the sell-off in MLPs could be related to the fear that tax exemptions afforded to MLPs could disappear going forward (MLPs are able to avoid “double taxation” of dividends as long as certain criteria are met). While the elimination of those tax advantages is certainly a possibility, it would do very little to solve the fiscal issues; according to the Joint Committee on Taxation, the MLP tax breaks would generate only about $300 million for the government–or about 2.5 hours of deficit buildup [see also ETF Picks For 3 Of America's Best Small Companies].

Another factor that may be weighing on MLPs this week relates to the outlook for U.S. drilling activity–which in turn drives the demand for transportation and storage services provided by MLPs. As highlighted during the debates, Obama is considerably less open to increasing drilling in the U.S. while his opponent had made the Keystone Pipeline a key part of his initiative to create domestic jobs. That boost to MLPs is likely now off the table [see 5 ETF Strategies To Reign In Risk].

High Yield Opportunity?

Of course, the recent decline in prices has had the effect of pushing up yields on MLP ETPs; effective distribution yields are now as high as 7.8% for the Cushing MLP High Income Index ETN (MLPY, B+) and 6.3% for the popular Alerian MLP ETF (AMLP, A). Again, it’s worth noting that the operations of these entities are relatively stable; they generate fee-based revenue that doesn’t depend much on spot prices for oil and gas, and the current tax code incentivizes them to pay out substantial portions of current earnings in the form of dividends.

In other words, the recent sell-off has perhaps created some attractive entry points for an asset class that should continue to churn out cash to shareholders for the foreseeable future. If you’re considering a position in MLPs, it’s worthwhile reviewing the pros and cons of the two primary structures through which these securities can be accessed–this is one case where ETFs and ETNs are very different.

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